Don’t get robbed: 8 steps for collecting your small business debts

You’re great at what you do. But are you a quick shot at getting paid?

If you’re like most small business owners, you pride yourself on working hard to win contracts and customers, and on providing products and services that delight and exceed their expectations. You know that it’s your responsibility to deliver what you promise, on time and on budget. So why don’t your customers hold up their side of the bargain? Why isn’t the check in the mail?

You don’t have to just stand there shaking in your boots. By applying the same diligence to your accounts receivables as you do to the service or product you provide, your chances of getting paid start looking a lot better. Sure, you might not always end up with the money you deserve, but every dollar counts, so it’s worth chasing them and setting up practices that encourage your clients to pay in the first place.

One common mistake is that many businesses only think about debt collection when someone pays late. In fact, there are many preventative measures you can take that will make it easier to collect payment in the long run. Then, if you still end up with a runaway account, it’s important to outline your collections procedure and follow through. The key is to define your process from start to finish and stick with it–and your bank account will thank you for it.

Here’s how to be a quick-shot at getting paid. Customize this for your own business needs, but whatever you do, make it a priority.

1. Don’t deal with them if they look shifty.

It seems simple, but it’s the foundation for keeping your business out of the red. Let’s say you have a home contracting business. You remodel a customer’s kitchen, installing a beautiful new marble counter top, new cabinets, and state of the art fixtures. The total value of the remodel is $40,000. If you plan on working on credit, you must-must-must check the customer’s credit-worthiness to assess the level of risk–and if their credit doesn’t stand up to your standards, don’t do it. You can have them pay up front, or don’t take the job. You can use the Rocket Lawyer Business Credit Application form now or learn more by reading “How to Do a Credit Check”.

2. Get it in writing, or nothing doin’.

Once you’ve decided to extend credit, and even when a customer is paying in advance, creating a contract is essential because it keeps you both on the right side of the law. It not only clarifies the work that you’re delivering, the timeline, and the budget, but it also gives you a chance to make sure that the customer understands your billing procedures, and to outline it in writing for future reference (and most importantly, with the customer’s signature acknowledging your terms). If there’s any question as to the terms of the arrangement down the road, you’ll have the signed contract as evidence of the arrangement.

3. Hold up your end of the bargain, including the billing part.

If you want your customers to pay on time, you need to bill them on time. A friendly email or reminder phone call the day before the bill is due is a good way to prevent accounts from going into arrears — it prevents the client from “forgetting” and discourages your customer from giving you the run-around. Offer to pick up a check in person, so you won’t hear the old excuse that it’s “lost in the mail.” If you show that you’re on the ball, you’re much more likely to have customers take your bills seriously. You can also offer a discount if the client pays on time, or penalize your late-payers with an additional fee if they don’t pay on time (of course, put this in your contract in step 2, so it doesn’t come as a surprise).

4. If they don’t pay by sun-up, act the part (in writing).

Send a series of collection letters at predetermined intervals, and escalate the tone over time — start out with a friendly reminder, and get more serious the longer the bill has gone unpaid. Consider having your lawyer write a letter once the account has become very overdue — it can help communicate the seriousness of the situation to the customer, and can encourage customers to pay if they don’t take your letters seriously.

5. Call often but don’t make it a show-down.

Call the customer at respectful but regular intervals, and try to find out why you haven’t been paid. Sometimes customers are trying to juggle multiple bills, are waiting for a check to come in, or they just simply forget. If it’s just a matter of timing, you may be able to work out a compromise or an alternate payment plan. Other times, they have no intention of paying. In this case, you have to take more serious steps to get the bill paid.

6. Cut your losses and consider moving on to greener pastures.

Sometimes getting paid partially is better than not getting paid at all — offer to discount the amount due if the customer pays immediately. Generally this is a better strategy than bringing in a collection agency, who may take a cut of up to 50 percent of the debt (ouch!). If you do alter the terms of your initial payment terms, make sure to create a Debt Settlement Agreement to make sure the original terms of the contract have been satisfied.

7. Call in the posse.

If you still can’t get the debtor to pay you (even partially), it’s time to circle the wagons and bring in a debt collection agency. Getting paid something is better than nothing, and the drain on your resources in following up with a client who is not likely to pay you can detract from your other business activities.

8. Ride into the sunset.

For a happy ending every time, vet your customers thoroughly in advance, get a contract, collect money up-front as much as possible, and cut your risk of non-payment by being polite, persistent, and making it your responsibility to get paid. Visit the Rocket Lawyer Debt Collection Center for more step-by-step help.